Natural resources revenues, shadow economy and financial institutions depth: The way forward

This article aims at investigating the impact of natural resources revenues, the shadow economy on the financial institutions' depth. Besides, it also examines the moderating role of institutional quality in the shadow economy and financial institutions' depth nexus. The study used data from the year 1991-2020 and employed the latest econometric techniques such as FADF, FGLS, Bayer and Hanck, DOLS, RALS, and cumulative Fourier Toda and Yamamoto Frequency to give realistic outcomes in the context of Pakistan. The results found the financial resource curse in the financial institutions' depth and a negative impact of the shadow economy on financial institutions' depth. The study highlighted that institutional quality plays a moderating role by mitigating the adverse effects of the shadow economy by promoting financial institutions' depth. The study suggested policy recommendations as strengthening financial institutions, redesigning the existing and offering new financial products could help in managing resources rent in Pakistan. Moreover, the government should ascertain such a strategy that provides incentives and attracts skills and investment from the informal market to the formal market to increase the tax base and promote financial institutions' debt. Additionally, by improving the quality of institutions, the government can control for misuse of natural resources revenues, reduce the shadow economy size and thus better financial institutions depth which can boost the economic growth of Pakistan.

Automated summary

This article investigates the impact of natural resources revenues and the shadow economy on the depth of financial institutions, and examines the moderating role of institutional quality in this nexus. Using data from 1991-2020 and employing various econometric techniques, the study finds a financial resource curse and a negative impact of the shadow economy on financial institutions' depth. It highlights the moderating role of institutional quality in mitigating the adverse effects of the shadow economy and suggests policy recommendations for managing resources rent and promoting financial institutions' depth in Pakistan.